Friday, September 29, 2006

- FBR comments on Cerner (NASDAQ:CERN) noting that yesterday, the U.K.'s National Health Service allowed CSC to replace Accenture as the primary local service provider contractor in the Northeast and Eastern regions under the Connecting for Health program. While both vendors used iSoft for clinical software development, CSC has been more solicitous of the troubled software provider's work, which probably limits further monster U.K. contracts for Cerner in the near term.

Cerner could benefit longer term if iSoft stumbles. Although the CSC news probably limits further near- term U.K. opportunities, the firm believes it also simplifies succession planning in three regions should iSoft continue to miss commitments or cease to exist as a going concern. Given the NHS' demonstrated preference for smooth transitions under IT contracts, Cerner's execution capabilities in the South and London may make it the de facto white knight on as many as three regions at once should change be inevitable.

Notablecalls: This is the type of stuff that may hurt high valuation stocks like CERN. While I have no idea how much of CERN's revenues come from UK, there has been a lot of talk regarding the NHS deals over the past 6 months.

-Baird notes thay believe Illumina's (NASDAQ:ILMN) high trading volume sell-off yesterday was related to uncertainty surrounding news of a lawsuit initiated by deCODE against former employees and their new employer, Children's Hospital of Philadelphia (CHOP).

These two institutions are the largest customers of ILMN. Firm believes that ILMN has excellent working relationships with both organizations. In fact, both installed systems in June/July and have been ramping chip usage. They confirmed with a CHOP representative that its Center for Applied Genomics plans to run business as usual despite this lawsuit. CHOP has stated that it will "vigorously" defend its employees.

While these lawsuits can cause confusion and become drawn-out affairs, they believe the lawsuit is centered around employer/employee issues and will not directly involve either ILMN or its management team.

Firm continues to believe that ILMN's genotyping and gene expression businesses remain robust and that the company remains on track for a good Q3-06 and 2006.

They believe that AFFX's 500K price reductions did lead to ILMN lowering its pricing structure, but think that ILMN's chips still command a premium price to AFFX's chips. Firm notes they have talked to some researchers who stated that they have used the price reduction to increase the number of samples they could run.

Maintains Outpeform and $41 tgt.

Notablecalls: Not actionable but good to know. When stocks start going down on reasons like this one, it's usually a bad sign for the bulls. Generally, I believe the better opportunitities are to be found on the short side over the next months.

- Wachovia comments on Monster Worldwide (NASDAQ:MNST) saying that when they assumed coverage of MNST on 8/22/06 they thought the deceleration in the overall U.S. help wanted ad market could continue, potentially more quickly than anticipated. Exiting 3Q, it appears that their employment ad thesis is playing out, and they believe data is pointing to continued deceleration in job posting growth. Therefore, the firm is modestly lowering their estimates for 4Q06 and 2006 to $0.33 and $1.19 (guidance of $1.17 - $1.22), from $0.34 and $1.20 respectively, and are maintaining Market Perform rating.

Help wanted ad revenues for co.'s fell 2.3 % in 2Q but declined sequentially by 6.4% and 7.8% in July and August, and channel checks and posting counts imply continued deceleration in Sept. Importantly, while they think the secular shift of employment revenues from print to the Internet is intact, they also believe the online segment is also beginning to slow, supported by online posting counts.

Firm's staffing firm online counts showed y/y posting growth slowing as well, from the high teens in early 3Q to the mid to high single digits in Sept.

Valuation Range: $38 to $40

Notablecalls: So now we know why MNST took that big hit on Monday. Would not be surprised to see some additional weakness over the coming weeks. The shares are not expensive but nor are they cheap. Trading around their growth rate that seems to be slowing.

- Thomas Weisel Partners is positive on Rackable Systems (NASDAQ:RACK) ahead of results saying are comfortable with their estimates of $85mn in revenue (a 48% y/y increase) and $0.20 in pro forma EPS for Rackable in the current September quarter. They continue to believe that Rackable could grow 35-40% over the next several years, with improving margins: a classic growth story at an attractive valuation, in firm's view.

Firm believes the most likely scenario for Rackable this quarter is some very modest possible upside to their estimates and strong guidance, with some chance for an alternate scenario of more significant upside this quarter, but then less aggressive guidance.

Rackable seeing success in EU: Expect an increase with Amazon (and others) in EU this quarter and next, after a drop to 1% of total revenue last quarter due to a planned reduction in spending.

Terrascale a big boost to Storage offerings: Rackable now has a proprietary high margin offering that aligns perfectly with its target server customers. The distributed file system market should grow rapidly, and the primary competition today is with small private companies.

Notablecalls: Not actionable but good to know category. Absolutely nothing new in this note. Although I must admit I may have been somewhat too negative on the co in the past. RACK may indeed be one of tech's secular growth stories. As TWP notes, they believe that Rackable could be a $1-2bn company in the next three to five years, with 10%-plus share of the low-end server market complemented by a healthy high-margin storage business.

- Merrill Lynch reiterates their Buy on Corning (NYSE:GLW), and raises price target back up ($30 from $24). Firm's new target again assumes the shares approach 25X new 2007 EPS estimate of $1.25 (vs. $1.18) or ~1X PEG ratio to 2007 EPS growth, which can also occur in 2008 as LCD TVs penetrate further. Firm ups their 2006 EPS estimate a penny to $1.01. Prior target assumed a lower P/E (~20X) on pricing pressures that have eased. VZ headlines could help but the EPS impact is limited.

The firm is also modeling in troubles at a portion of a competitor's operations (Asahi; ~20% market share vs. ~50-55% at GLW family) to help EPS by a penny per quarter in Q4 and Q1 due to reduced industry pricing pressures and some incremental share gains.

The new 2007 EPS estimates also reflect higher LCD TV estimates that could still be conservative (~65MM TVs vs. a prior estimate of 60MM and 40MM in 2006E). They are most recently encouraged by further TV price declines (down 12% in the past 11 weeks), which are a good leading indicator. Also, the trend toward larger size TVs (which is highly beneficial to Corning given the square meters of glass) could still outpace current expectations. According to firm's LCD tracker, retail prices for LCD TVs are down 21% since the beginning of the year. Lastly, large discounts on 'Tier II' brands could provide another competitive pricing impetus.

Notablecalls: These comments are likely to spur some buy interest in GLW. Would not overstay my welcome as there is nothing really new to be found in the note.

- Teradyne (NYSE:TER) will be in the casualty list today as two firms are cautious on the co this AM:

* Banc of America is cutting their second half calendar 2006 estimates oN TER saying they think the ongoing chip inventory correction will result in weak orders in the SOC test segment and Asian contract manufacturers. Teradyne has high exposure to both.

They now estimate that September revenues will be $350M, at the low end of prior guidance, $340-370M. Firm expects December revenues to decline another 7% to the $320M range.

With most of the restructuring behind the company, earnings appear to be peaking in the $1.00 range or $0.85 fully taxed. It raises questions as to the normalized earnings power of the company. To date, the firm was thinking that peak earnings would be in the $1.30-1.40 range, fully taxed.

If the normalized earnings estimate moves materially lower because of a lower than expected peak earnings, then there could be downside risk for the stock to the $10 range. The firm will wait for the earnings call to consider any adjustments.

* FBR notes their checks at subcontractors/contacts suggest that 3Q bookings decline will be in the 30%-40% range QOQ, much worse than expectations of down 20%, thus resulting in a shortfall in revenue/EPS estimates. The firm expects semi test bookings to decline by as much as 35%-40% QOQ, while non-semi test bookings are expected to decline by 30%-35% QOQ. Their checks also suggest that semi test bookings by subcons were especially weak, with an estimated 40%-plus decline sequentially.

Given such a scenario, they expect shortfall in their revenue and EPS estimates in both 3Q and 4Q.

Given weaker 3Q bookings, they are lowering their below-consensus estimates. 3Q/4Q revenueestimates changed from $355M/$321M to $348M/$251M, vs. consensus of $354M/$336M. GAAP EPS estimates changed from $0.18/$0.14 to $0.16/ $0.05, vs. consensus of $0.20/ $0.16. Pro-forma EPS is ~$0.03 > GAAP in 3Q and 4Q. Consensus began to decline post 2Q06 earnings report, and the firm expects another round of cuts following 3Q06 report.

Reits Underperform and $11.50 tgt.

Notablecalls: Both calls are actionable and together they will likely do some serious damage to the stock price. In fact, I would not be surprised to see the whole Semi space to get hit following the notes.

According to the Barron's Online shares of Force Protection (FRPT.OB) have rocketed 513% over the past 52 weeks, but two insiders at the armored-vehicle manufacturer have also sold off hefty portions of their stake in the co. In transactions from Sept. 22 to 26, Force Protection's CEO and general counsel together sold nearly $5m in stock. Ben Silverman, of InsiderScore.com, notes that both men sold off significant portions of their stake in Force Protection. Considering the amount of insider selling, Silverman says, "This is the perfect time for investors who were in early on the name or came to the party when [Force Protection] still had a lot of upside, to…take some profits."

Barron's Online "Weekday Trader" section suggests that for investors gunning for big returns in the energy sector, the recent drop in oil and natural-gas prices has proved to be a challenge to best-laid plans. But the dip may provide some buying opportunities. According to savvy investors at the John S. Herold Pacesetters Energy Conference Thursday, trusts with dividends near 8%, exploration co's with undervalued assets and alternative energy solutions like wind and ethanol offer promise. "The economy in the next 25 years will be about oil rationing, oil replacement, fads, busts, incredible discoveries," says Ashton Lee, a hedge-fund manager with Lucas Capital Mgmt. "So how do you make a buck?" "We love long [oil and gas] reserve life and cheap co's," Lee told an audience of investors and energy-sector professionals. On his short list is Canadian Oil Sands Trust. Shares in the trust are down 20% from their 52w high. The heavy crude the co produces in Canada has a 35y reserve life, making it likely that its dividend yield will rise, says Lee. But its reserves are trading at $6.40 per barrel. And he likes global integrated oil giant ConocoPhillips (COP), whose reserves of oil and equivalents are valued at $7.43 per barrel. Even if some of those reserves are in political hotspots for energy like Venezuela and Russia, the assets are worth more, Lee says.

DigiTimes reports that Founder Technology, China's 2nd-largest PC provider and the world's 7th-largest desktop PC vendor, on Sep.28 announced it will begin selling desktop PCs based on AMD64 processors in China next month. The co is also looking to expand its sales agreement with AMD (AMD) to cover notebook and server mkts in the near future.

Thursday, September 28, 2006

- Eric Ross and Eddie Cheung from ThinkEquity are downgrading Advanced Micro Devices (AMD) from BUY to SELL and lowering price target from $30 to $20 as they believe AMD will suffer in 3Q06 and 4Q06 from several issues.

They believe the supply chain at Dell is incorporating AMD parts slower than expected (due to DELL-specific issues). AMD's margins are likely to be lower than expected due to a higher mix of laptop processors, and DELL revenues cannot make up the difference. And they believe AMD is still seeing pricing competition from Intel even though pricing cuts are slowing in the near future. A weaker antitrust suit against Intel and a much later trial date of 2009 are negatives as well.

Eric and Eddie note they heard in Asia that AMD is likely to suffer near-term from the DELL supply chain. Their sources in Asia"corroborated by sources in the U.S."have indicated to that DELL's ramp of AMD products is progressing more slowly than originally expected. Most of this is due to DELL-specific issues, with DELL losing share and in disarray. Unfortunately for AMD, these revenues will not likely be booked in any significant way in 2007. While this is not tragic, they believe when the Street begins to hear this from other channels, it will provide downward pressure on the stock.

They want to emphasize that this is a trading call, not a long-term investment call: They believe AMD is a solid company, with superior technology and a real chance to gain substantial market share over the next several years. In the near term, however, a challenging supply chain, mix/ margin issues and Intel's product refresh will most likely curtail AMD's share gains and/or profits.

Notablecalls: What a U-turn! Check out ThinkEquity's comments on AMD from last week. Or the week before. But, as Eric and Eddie note, this is a trading call. AMD is now heading lower, just as I suspected yesterday. And ThinkEquity seems to be beating all the other firms yet again (notice Citi upping their ests and tgts this AM, also BAC yesterday).

- Piper Jaffray comments on Novatel Wireless (NASDAQ:NVTL) saying Nokia announced the development of an HSDPA module designed to be embedded in notebook computers, in collaboration with Intel. The module will be included as part of Intel's next-generation Intel Centrino Duo platform.

Firm believes Novatel Wireless has more experience delivering wireless data solutions to notebook manufacturers, and has a strong portfolio of design wins that are expected to ramp later this year and into 2007

Nevertheless, they believe Nokia's new product offering could accelerate competition for future design wins and add further pricing pressure. Firm believes a combined Nokia/Intel solution could prove compelling to laptop OEMs seeking to streamline their supply chains, although performance specifications for Nokia's solution are unclear.

Maintains Mkt Perform and $12 tgt on NVTL.

Notablecalls: Not actionable but good to know category. Competing with the likes on Nokia will likely have a LT negative impact on margins.

- Citigroup is raising their estimates and price target on AMD (NYSE:AMD), reflecting solid PC environment and strength in AMD's OEM business Dell represents an obvious source of strength but upside comes from HPQ, who helped buoy 1H September Contrary to concerns over a price war, the 3Q06 pricing environment was relatively stable versus expectations. This and mix shift weighted toward OEM business drives them to increase 3Q06 GM estimate.

Revenue estimates 3Q06 to $8.6B from $8.4B; 2006 to $35.0B from $34.6B. GAAP EPS for 2006 to $0.81 from $0.79.

Inventories to not increase as much as expected given strong unit sales and increased production of chipsets. Solid outlook expected for 4Q06, reflecting seasonal PC trends, and improved gross margin outlook on Core 2 Duo push in the channel. Firm notes that while they were too early when they upgraded Intel, they believe the groundswell is forming for a turnaround in 2007. Firm confidently views Intel as a 12-month Buy.

Notablecalls: Not actionable but good to know. Citi's late. The stocks have made their moves.

- Jefferies notes that at the Intel's Developers Forum, the company displayed a prototype 128 MB wafer based on Energy Conv. Devices' (NASDAQ:ENER) phase change memory that it intends to use as a flash memory replacement. Firm believes this is a significant development that is likely to drive ENER's share price higher.

This is the first confirmation from Intel that it was developing a product based on this technology. Importantly, Intel has staffed an entire "Phase Change Group" to develop this technology. And according to Intel at the forum, phase change memory is likely to be the memory technology of the future. Where Intel goes, others likely follow.

Firm notes they have not included any revenues or licensing fees from phase change memory until they get better visibility on the timing and scale of product rollout from Samsung, Intel and others. But the market for DRAM and Flash memory is expected to be close to $50 billion in 2008-2009. At a 1% licensing fee, this could amount to an incremental $2.50/share to earnings.

Jeffco is calling ENER shares inexpensive saying the co is is trading at a discount to the solar industry even though it has similar expected growth rates and the best balance sheet with $400M in cash. They reiterate Buy rating and $65 price target, which is about 90% upside from current levels.

Notablecalls:High five to Jeffco's Clean Energy team! I know some people from Jeffco are reading this blog, so do give my best regards to Bencik. ENER will surely see strong interest in the coming days. Note that the $65 price tgt does not include any contibution from INTC.

Wednesday, September 27, 2006

- Banc of America notes that based on channel checks within the Asia supply chain, they believe that AMD's (NYSE:AMD) Sept qtr is tracking above current consensus forecast for 7.5% Q/Q rev growth. The upside in large part is being driven by 1) a significant improvement in microprocessor fundamentals from depressed levels in 1H06; 2) a healthier inventory situation in the channel following significant reduction to excess inventory for AMD's parts from elevated levels in June; and 3) the ramp of Dell's business, which, although only a modest contributor to AMD's Q3 results, is having a 'ripple effect' by driving upside to near-term orders from OEMs and the channel. Consequently, they are raising otheir Sept. qtr rev est from +3.5% to +9.9% Q/Q, with new CY07 GAAP EPS est. now at $1.35, up from $1.15 previously (consensus of $1.34).

Despite the strong unit upside vs. initial forecasts, the firm believes that the strong reception of Intel's Conroe, coupled with the attractive prices for Intel's other desktop products is limiting AMD's market share gains in desktops. Overall, despite the increased presence at Dell (they project 15-20% share at Dell by Q4), they think AMD's overall market share gains will be limited at best, and will likely be offset by share gains by Intel elsewhere (Apple, channel).

Maintains Neutral. Tgt goes to $26 from $23.

Notablecalls: Sorry, guys from ThinkEquity beat you by about 2 weeks. Also, AMD stock looks to be turning South from here.

- Piper Jaffray notes that recent channel checks (at several Dick's and Sports Authority locations) indicate significant sell-throughs of Under Armor (NASDAQ:UARM) football cleats. Nineteen of twenty retailers indicated that selections were very limited, particularly in the higher priced Metal line (retails at $109.99). Perhaps even more importantly, the "on field" performance of the shoe appears to be solid as only three of the twenty retailers reported returns. Fim believes the successful launch of footwear further establishes UARM as an emerging "top-tier" athletic brand.

They believe Under Armour's ability to establish a strong customer following in new categories such as golf will enable it to offset the natural seasonality associated with the company's traditional compression apparel. In addition, the company's ability to capture increased market share in the much larger loose fitting athletic apparel sector (according to NPD and SportScan the active sports apparel market is approx. $12B of which compression makes up approx. $400mm-$500mm) enables it to capture additional floor space at key retailers.

At this time, the firm is taking up their FY06 and FY07 EPS estimates from $0.70 and $0.95 to $0.72 and $0.96, respectively. In tandem with earnings adjustments, they are keeping price target intact at $38 (40x new FY07 EPS estimate of $0.96).

Notablecalls: So, there is much more sell-through than Piper originally thought but ests go up by a measly $0.01-$0.02? Also, it's the 3rd time Piper has issued positive comments on UARM but left their tgt unch'ed. That will not move the stock up.

- UBS comments on BearingPoint (NYSE:BE) saying 06 pro forma results were ahead of aggressive ests & the business trends into F07 are very solid. Bookings & rev growth ests were very strong & oper margins of ~10% are a year ahead of schedule, but turnover remains a concern. 1x-ers will cause F06 cash & FCF to be lower than expected, but the firm thinks the outlook for recurring ops in F07 & beyond looks very compelling.

The firm spoke to several convert experts and think BE (to file the 10K & prevent mat'l business disruption) & the Series A/B holders (b/c they are subordinate to the banks & Class C/D tranches) are both incented to get a fair deal done quickly & move on (hopefully in the next few weeks). The process could drag on but b/c that would be debilitating to both parties, the firm thinks it's less likely.

Strong fundamentals, valuation & potential for a relatively quick resolution on the debt causes the firm to think potential weakness indicated in after-hrs trading will be short-lived. On even more conservative ests, DCF suggest a $12 value & they project a F07 FCF yield of 12%. Firm would view weakness as a buying opportunity.

Notablecalls: BE stock was down as much as 15% in after hrs trading. That looks a bit excessive. Would be a buyer around these levels.

- Jefferies has positive comments on Intel (NASDAQ:INTC) saying that on the first day of IDF, they were impressed with Intel's technology and manufacturing plans. The firm is getting increasingly convinced that the company has turned around and should begin to regain market share on back of its new products, superior roadmap and manufacturing capabilities. Finally, Intel now has in place all the ingredients that should enable the company to show demonstrable share gains in 2007 and beyond.

Company unveiled quad core processors for servers and desktops. These new processors are expected to ship in middle of November this year. Firm is encouraged by Intel's introduction of Quad- Core MPUs at least six months ahead of AMD (NYSE:AMD) and believes that this is a sign that Intel is aggressively responding to AMD's lead in multi-core architectures.

Based on their increased confidence in Intel's ability to compete driven by a competitive product lines across the board and a leaner organization structure, the firm is raising their 2007 estimates for Intel. While they are keeping revenue estimates unchanged at $38.8B, the firm is raising pro-forma EPS estimate (including ESOs) to $1.09 from $1.02. A superior product line should result in better pricing power and improved margin profile. Current 2007 street estimates for INTC are $37.7B/$1.09.

Tgt is upped to $24 from $22.

Notablecalls: Not actionable but good to know category. I still think INTC is a sell here. It will take more than new processors to fix this one.

- Thomas Weisel Partners comments on Apple (NASDAQ:AAPL) after just completing a round of about 30 channel checks with Apple specialist resellers and Apple retail stores across the United States, and their checks suggest strong demand for Intel-based notebooks. Firm's checks suggest that 50% of Mac buyers are switchers and that there is quite strong demand for MacBook. Checks also indicate a healthy demand/supply balance and availability for most products; thus, Apple should be in a position to deliver upside relative to firm's original estimates for notebooks. They continue to believe that the real key to the Apple story over the next 12 months will be the actual Mac units sold, as iPod momentum is likely to fade somewhat.

iPod checks suggest relatively less excitement related to new products compared to previous launches. More than 70% of checks indicated that iPod demand is the same or worse compared to last quarter and the firm saw limited stock-outs, the first time in recent memory whenApple has sufficient supply of the newly launched products.

TWP believes that the strength on the notebook side could mean that Apple might post numbers above current Street estimates, but notes that expectations appear to be increasing. They are increasing their ests as well.

At a 26.4x C07E P/E, Apple is slightly above the group average of 21.1x, but on a PEG basis, Apple is at 1.3x below the group of 1.7x. This suggests valuation is reasonable, thus they maintain a Peer Perform rating.

Barron's Online discusses Arch Coal (ACI), whose stock is down roughly 30% so far this year. But prices for Arch's coal, concentrated in Wyoming's Powder River Basin, look favorable long term. Western coal is increasingly needed over Appalachian coal for its cleaner-burning qualities and abundance. And as winter comes, and coal-fueled heat kicks in, supplies should moderate, boosting coal prices broadly and Arch's profits. Add to that a cheap valuation and Arch shares look like a compelling energy play. "We believe most of the coal-fired power-plant demand added over the next decade is going to use Powder River Basin coal, and the most leveraged to that is Arch Coal," says Adam Donsky, of Dynamic Focus+ Balanced Fund. "And the stock is very cheap."

"Inside Scoop" section highlights XTO Energy (XTO), whose two insiders have sold $25.1m worth of shares. On Sept. 21, CEO Bob R. Simpson sold 575K shares, pocketing a total of $23.1M in the transaction. On the same day, SEVP Vaughn Vennerberg also sold 50K shares for a total of $2M. Simpson's transaction last week is notable in part b/c it marks the first time in 3 years that his stock sales have not been options-related, says Ben Silverman of InsiderScore.com.

Firm's 2H FY06 and FY07 estimates are unchanged, however, they maintain an upward bias given early signs of strong retail and consumer acceptance of fall styles including the Mary Jane, Prima, and Islander and strong initial order flow for both the NCAA and Disney product - all of which offset seasonality tied to Crocs' heritage spring styles.

They estimate the company will add roughly 1,000 net new doors during FQ3, including ~200 doors through West Coast boardsport retailer Tilly's and mall-based retailer, The Walking Company. The acquisition of Marshall Field's (MAY) by FD/Macy's also provides a foray into roughly 400 Macy's East and West locations.

By year-end, the firm expects capacity to near 3.5M units/month progressing toward 4M units/month into early 2007.

- CIBC notes that RF MicroDevices (NASDAQ:RFMD) remains firm's favorite RF component company. Although prospects for gross margin expansion appear modest from current levels, they believe that revenue growth, driven by seasonal strength in 2H06 and content gains in 3G handsets, may provide upside to our current EPS expectations. In firm's view, they believe that RFMD could achieve operating margins in the 15% range with gross margins of 37%.

Despite recent concerns of loss of share at Motorola to Freescale and Skyworks, they believe that the company is maintaining its strong position at both MOT and NOK. Moreover, they believe RFMD will benefit as these two OEMs in particular are likely to have strong 2H06 results based on both overall handset demand and continue market share growth. Firm believes that RFMD is already seeing an increase in demand from these customers in typical seasonal fashion and that this increased demand is likely to deliver upside to RFMD's C3Q06 results and C4Q06 expectations. Moreover, the firm believes that RFMD could deliver a still stronger 2007 as EDGE demand increases.

RFMD shares currently trade at 1.7x CY07E TEV/sales, a premium to the company's closest comp Skyworks (at 1.1x) and in line with the peer group. In firm's view, RFMD continues to grow market share and increase its relative dollar content in handsets with its Polaris transceiver and front-end modules. In addition, the company expects to see growth in its wireless connectivity business with Bluetooth, GPS and WLAN products. Therefore, they believe the shares are attractively valued and reiterate Outperform rating.

- CIBC reiterates their Sector Outperform rating on Openwave (NASDAQ:OPWV) and raises their tgt to $12 from $9. A rash of recent deals supports their thesis that key mobile data foodchain participants like OPWV are being aggressively targeted for M&A. Given going takeout prices, firm's implied 1.5x EV/rev target for OPWV remains conservative.

Firm believes Openwave's most attractive assets include: its widely used WAP gateways, which an established OEM/SI could leverage to win more service engagements; the browser business, with its unique penetration among feature phones; & Musiwave, one of the last remaining mobile music plays.

The new tgt also considers the net present value to an acquirer of OPWV's NOLs. OPWV has approximately $1.1B in federally recognizable NOLs and $391M in NOLs recognizable by the state of California. Firm believes these would give an acquirer a tax saving with an NPV of $148M ($1.60/share).

The price target of $12 is at a slight discount to firm's sum of the parts valuation, which pegs Openwave's value at approximately $13. New price target implies and EV/sales value of 1.5x, well below the 2.0x-7.5x takeout multiples fetched in the space in the last several months (including WiderThan, Mobile365, and Mobilitec).

Notablecalls: Nice note but nothing really new in it. Would expect mild buy interest following the call.

- Goldman Sachs is adding FormFactor (NASDAQ:FORM) to the Americas Investment Conviction List, as they see the recent pull back in the stock as an opportunity for relative andabsolute return investors to initiate long/overweight positions in the name. Firm believes the stock's recent underperformance has been driven by concerns regarding a slowdown in the DDR2 transition in Taiwan, which the market expects will have a negative impact on FormFactor's fundamentals in the near-term. They view the market's reaction as overly negative and continue to see 20% upside to $50 price target, as: 1) the end of the DDR2 transition was fully expected, and (2) they believe there are several factors that are continuing to drive positive business momentum for the company over the next several quarters, which are currently being overlooked by the market.

Firm expects FormFactor's upcoming earnings report to serve as a positive catalyst for the stock. While the Street currently expects 3QCY2006 results and/or 4QCY2006 guidance to be negatively impacted by the slowdown in DDR2 demand in Taiwan, they expect 3QCY2006 results to be in-line with expectations (estimates $95 mn in 3QCY2006 sales and $0.33 in EPS, including ESOs) and for 4QCY2006 guidance to be solid.

Notablecalls: Actionable call! FORM will see buy interest today. I see around 2 pts of upside by minimum

- Deutsche Bank notes that fundamentals at Kos Pharma (NASDAQ:KOSP) continue to appear lackluster. And while they remain hopeful for a turnaround given the company's unique product portfolio, the outlook remains murky. It is well documented, but Rxs remain sluggish with flagship drug Niaspan growing just 2%, Advicor just 4%, and Azmacort declining 9% Y/Y. Only Cardizem LA Rxs have improved, with NRxs up 12% after declining 1% last May. And with the Takeda copromote ending soon, Kos will have roughly 15% less "share of voice" in 2007.

Several long-standing officers of the company have departed in the past month. They include, most importantly, the head of sales and marketing, and the two R&D leaders of the inhalation program. In tandem with historically high turnover in the sales force, these changes could potentially foreshadow execution issues or pipeline delays.

The most noteworthy of which is Richard King, who was Kos' executive Vice President of commercial operations for the past five years. Besides leading Kos' sales effort and helping grow the company's revenue base from approximately $91M in 2001 to well over $800M currently, Mr. King was responsible for 800+ professionals (over half of all employees). Given his major role within the company, the firm is not sure why his resignation was not announced. In addition, two vice presidents who lead the company's inhalation R&D and biomedical engineering development programs have also recently resigned.

Much has been made of the potential competition from Merck (MK-0524) and Pfizer (torcetrapib) later this decade. At this point the jury is still out and may well be so for some time. That said, they believe '07 consensus EPS ($2.63) is too high and even firm's $2.43 may well be unachievable per the aforementioned issues. 12-month price target is $43, based on 17.5x '07 EPS est. Key risks to this target primarily relate to Rx trends and patent challenges to the company's core promoted products.

Notablecalls: Ouch! This one's not pretty! Deutsche has done some quality work here and this will put pressure on the shares. The only problem with this trade is that it may already be somewhat crowded. If a guy of Mr. King's reputation leaves a company, people will soon know. So, there may be some people already short the common. Also, Deutsche has some of the most powerful in-house trading operations on the Street.

- Several firms are commenting on Advanced Medical Optics (NYSE:EYE) after the co revised its guidance last night:

- Wachovia notes that for the third straight year, AMO management dropped a "surprise" on the street by pre-announcing a soft Q3 revenue result ($255M) at and lowering its 2nd half revenue and EPS guidance citing, in order of importance: 1) Slower market development of the PIOL market esp. internationally, 2) weaker than expected domestic LVC volumes (mgmt. stated they had expected procedure growth of 3-5% for 2006, given H1:05 was ~flat Y/Y, thissuggested a meaningful acceleration of growth in H2:06 which didn't materialize and now mgmt. is looking for a ~flat 2006 in procedure growth), and 3) intl. reimbursement challenges and EU physician strikes. While these were the challenges cited by management relevant to some of their internal parameters, the firm notes they had largely anticipated the first two (and largely confirmed these thoughts coming out of the most recent ESCRS meeting) and the third point strikes as a bit odd given the surgeon strikes were largely over by August and were not cited as factors when they were ongoing in Q1 and Q2. Meanwhile, reimbursement challenges are hardly new and they do not believe there were any material "new" events in Q3 relative to the previously cited challenges by management on the Q2 conference call or from the reimbursement changes made in Japan this past March.

Firm's read through the pre-announcement (~$255MM in Q3 revenue, 20% LVC, 32% vision care and 48% cataract) suggest more is going on than delineated in management's explanation and that in fact AMO's base cataract business (phaco, visco, disposables and monofocal IOLs, or some combination thereof) continues to lose share to Alcon. As they have noted in previous notes they believe the most recent financial update suggests the company is struggling (apparently unsuccessfully) to move up the value chain in the cataract implant businesssegment as it "rationalizes" older generation products.

Even at a reduced price the firm is inclined to stay on the sidelines and reiterate their Market Perform rating. While mgmt. has finally faced near-term reality of the PIOL and domestic LVC market, they believe the company's new 2007 guidance has the distinct potential of continuing the trend of over promising and under delivering. Firm maintains their preference for ACL and believes AMO's preview reflects the realities of ACL's dominant, premier global ophthalmic franchise and ACL's ability to continue to capture market share.

- Merrill Lynch suspects Advanced Medical Optics will remain under pressure today following downwardly revised sales and EPS targets for 2006 and 2007. Despite the reduced outlook, they continue to believe AMO is an attractive investment and view the weakness as an opportunity to either establish or build upon a position in the stock at a compelling valuation. As such, they reiterate Buy rating.

After reducing their price objective to $54 from $57, AMO still offers a potential gain of nearly 20% from current levels, while incorporating a discounted multiple to compensate for additional risk. Indeed, they view AMO's valuation as particularly attractive, with its PE at a significant discount to three of its four comps, while providing a healthy EPS CAGR of 15%. As such, AMO remains one of firm's favorite mid cap stocks and represents good growth at a reasonable price, despite the tempered outlook.

Bear thesis lacks vision; AMO a story worth sticking with Admittedly, AMO has struggled while trying to reposition itself for future growth, providing detractors with seemingly greater credibility. But bears seem to miss the point that AMO is undergoing a strategically smart transformation that should enable the company to achieve greater success over the long term. Thus, despite some unexpected disappointments along the way, they continue to believe AMO will reward investors who are willing to stay the course.

Notablecalls: EYE will surely get hit today. Would not be looking to play a bounce until the stock crosses the -10% level.

According to the WSJ's "Heard on the Street" column, a change in the govt of Sweden could uncork one of the liquor industry's hottest brands: Absolut vodka. The center-right opposition party defeated Sweden's ruling Social Democrats, and in its first week in office, it is talking about selling off and privatizing many state-owned co's, the crown jewel of which is Vin & Sprit, owner of Absolut. The vodka brand would be one of the biggest trophies to come on the mkt in the liquor industry. Absolut is the world's 3rd-largest premium liquor by volume, after Smirnoff vodka and Bacardi rum. Vin & Sprit could be valued at $5.5bn, analysts say. Liquor-industry execs are talking about potential buyers. Pernod Ricards' CEO, Pierre Pringuet, said the world's No. 2 liquor maker by volume could be a possible bidder. "You would be surprised if I were to say that there was no interest on our part in such a brand," he said. "If the privatization of V&S is started, there is no doubt that all of the industry will be there." Absolut would help Pernod expand in the US, where it is currently the No. 4 competitor by volume, and just 1/3 the size of mkt leader Diageo (DEO). Other possible bidders could include Constellation Brands (STZ), Fortune Brands (FO), Brown-Forman (BFA) and Bacardi. "We look at all opportunities in the beverage alcohol space," said a spokesman for Constellation.

Barron's Online "Inside Scoop" section reports that Drew Industries (DW) may have hit another bump on the road to recovery. With shares of the co already dragged down by a slowing economy, insiders have been taking profits off the table. So far this month, L. Douglas Lippert, Chmn of the Lippert division, and two of his sons have sold 146K Drew shares in the open mkt for $3.88m.

Monday, September 25, 2006

- BMO Capital Markets are raising their 4Q estimates on Broadcom (NASDAQ:BRCM) to a 5% sequential increase from an earlier 2% sequential increase, which puts them in line with Street estimates.

Why the change? According to the firm, they did not believe management when it gave the original guidance, and their own checks at the time had indicated that business stayed very weak for 3Q. However, recently, per our industry checks, firm's sense is that Broadcom's own visibility has improved going into 4Q: specifically, the company's 12-week rolling forecast has stabilized. The areas helping 4Q are 1) ramp of the Wii game console platform, 2) 802.11n in new PC customers, such as Hewlett Packard, and Apple, 3) increasing handset shipments in 3G, potentially besides Samsung, 4) ramps at Bluetooth, and FM tuner in new customers, and 5) recovery in the DSL business, a little faster than anticipated recently, owing to ramp in sockets won against competitors. They believe these areas should offset weakness in areas such as enterprise that theybelieve remain soft.

RecommendationThey expect BRCM to OUTPERFORM the market.

Notablecalls: I've been hearing good things about BRCM over the past weeks. Would not be surprised to see some upside in the shares.

- Goldman Sachas comments on Research In Motion Ltd. (NASDAQ:RIMM) ahead of results sayingthey expect in-line revenues/EPS (ex- ESO) of $644mm/$0.72 on an operating margin of 27.0%. Consensus estimates are for Revenue of $645mn and EPS of $0.71. Firm's estimates are supported by expectations for 1.3mn device unit shipments and 687K new subscriber additions yielding total subscribers of 6.3mn at the end of 2QFY07.

With shares up 30%-plus since July, November quarter subscriber guidance and commentary around new device launches will be a key determinant of near-term stock performance. The firm believes that Street expectations for November subscriber growth are for 750-780k in new subscriber additions. Further, while they do not expect Management to issue February new subscriber guidance on Thursday's call, they believe expectations are forming for 13-15% in sequential growth in 4Q07.

The firm believes that Management will choose to remain conservative in its near-term guidance as they see little incentive to issue aggressive guidance at this early stage of the product cycle. As a result, guidance could disappoint as they believe that expectations have recently increased on the back of the Pearl product launch. Firm would use any near-term weakness in the shares as a buying opportunity given that the long term fundamental outlook remains strong.

Maintains Buy and ups tgt to $110 from $96.

Notablecalls: Goldman is hedging their bets smartly ahead of results. They saw the s*itty guidance coming from Palm (NASDAQ:PALM) and knew they needed to cover their a*ses. Even if RIMM misses, these comments set it up for a bounce.

- Goldman Sachs is recommending a 3-6 month long global DRAM/short Micron (NYSE:MU)pair trade. Firm's recommendation is driven by: 1) their view that global DRAM makers will continue to benefit from strong DRAM fundamentals through CY1Q2007, and 2) belief that Micron is unlikely to benefit from the current strength in DRAM to the same extent as its global peers. As a result, while strong DRAM fundamentals have driven Micron's stock to increase along with its global peers in recent months, the firm would expect the stock to begin a downward trend in the coming quarters

Regarding the DRAM market environment, the firm believe sthat the recent strength in DRAM fundamentals has been driven by: 1) Production issues at several DRAM makers (trench producers), as well as Micron's reduced bit shipments into the DRAM market, both of which have contributed to the recent DRAM capacity tightness, and in turn an increase in DRAM pricing, and 2) DRAM content per box growth being pulled forward into 2006 to meet Vista specifications. While Goldman's global team does expect DRAM fundamentals to pause beginning in CY1Q2007, they recommend that investors go long the global DRAM stocks (specifically ProMOS, Powerchip, and Elpida) against Micron given current strong fundamentals in DRAM and attractive valuations, as the Asian DRAM stocks are much more attractively valued than Micron and are fully benefiting from the strength in the commodity.

Micron continues to trade at 1.7X price to book value and 2.3X price to sales versus its Asian DRAM peers that are trading at 0.7X to 1.5X price to book value and at 1.1X to 1.8X price to sales. Firm continues to expect ~30% downside to their 12-month price target on MU of $12.00, which is based on a very aggressive 30X multiple applied to estimated normalized EPS of $0.40.

Notablecalls: Check out my comments on MU two weeks ago. The trade is working out nicely. Would not be surprised to see the shares produce a bounce over the next 2-3 days. That's what usually happens after a tier-1 firms comes out with a rec like this one. But overall, this one will continue to work.

While the firm acknowledges a recent order from Hynix, their work suggests it is no more than $5MM and is not fully incremental due to some lost business (MU).

Further, while FORM's competitive position remains strong, checks suggest MJC is now qualified for DRAM at Elpida + Powerchip (together ~1/3 of FORM revs in CQ2:06). While MJC remains capacity constrained, work suggests it plans to ramp capacity ~3X in the next 6mos.

They see these issues conspiring to, at the very least, break the string of + est revisions (they recently cut C2007 EPS) meaning this story goes from great to simply good for the next few Qs. Maintaisns Hold, will get more positive in mid-high $30's.

The firm has noted for some time long-term demand levels are below mgmt's long-term unit growth guidance of +5-9% and so mgmt may address on Oct 12th call. But given the strong retail performance so far this yr, Harley may not significantly alter long-term guidance at this point.

Maintains Neutral.

Notablecalls: With the weakening consumer, HOG remains a core short. Although I must say I'm surprised by the resilience of the co.

- Merrill Lynch comments on Polaris (NYSE:PII) saying their dealership checks indicate a relatively busy retail environment in the traditional ATV market driven by the upcoming hunting season and promotions. While inventory levels moderated slightly, the firm expects dealerships to be cautious in the near-term when ordering new ATVs owing to the difficult conditions of the last 15 months with weaker-than-expected sales and high inventory levels as well as the more conservative outlook for the overall US economy.

They estimate that Polaris's traditional ATV shipments (44% of total sales) will be down 12.5% and 4.0% in 2006 and 2007, respectively. However, as we move through next year, easier comparisons should provide a more favorable growth environment. Furthermore, they continue to hear continued strength in Ranger utility vehicle and Victory motorcycle sales, which should grow close to 20% in 2007 and offset the weakness in traditional ATVs.

Trading at approximately 11.4x 2007 EPS estimate, Polaris stock is below its 5-year and 10-year averages of 13.9x and 12.2x, respectively. Despite the mixed ATV outlook, they believe that most of the bad news is priced in the stock at this point in time and there could be increasing interest in consumer discretionary stocks especially if the Fed starts cutting rates next year. They are maintaining Buy rating but reducing tgt from $55 to $48.

- Jefferies notes that based upon recent checks, they believe Cingular is expected to launch its own location-based services offering very soon. Investors have been waiting for this for some time as it is a big first step for SiRF Tech (NASDAQ:SIRF) to begin to tap into the significant wireless opportunity.

They believe the service will only be available on select handsets to start - Motorola RAZR V3i, Motorola SLVR L7, Palm Treo 650, and Cingular 8125 - bu expect additional handsets will be added including those with integrated GPS chipsets. Firm believes that Cingular will be rolling out this service nationwide with the GlobalSat BT-338 GPS Receiver (using SiRFstarIII)

lthough the fundamental impact will not be significant yet, the Cingular announcement represents a strong validation for LBS. They do not expect the rollout of LBS by Cingular to have a material impact to revenue in 2H:06, but do believe it paves the way for significant revenue contribution in 2007. T- Mobile will not be far behind in launching its own LBS offering in the U.S.

Concerns regarding Q4 revenue growth will likely be eased as investors will begin to look to 2007.

Reits Buy and $31 tgt.

Notabelcalls: Expect to see some buy interest in SIRF following the note.

Firm's checks indicate Apple's Back-To-School (BTS) season was healthy. Moreover, the new Beyond-the-Box (BtB) devices are expected to hit the shelves in time to drive increased visitor traffic through Apple's retail stores during the holiday selling season. They believe Leopard and iLife software refreshes and the launch of iTV in early CY07 and success in the enterprise later in '07 will boost revenues, increase earnings power, and expand valuation multiples.

The Leopard OS (Mac OS X version 10.6) launch is scheduled for spring 2007. Thefirm believes recent improvements in iTunes and the impending iTV set-top box product launch will serve as catalysts for Mac OS X users to upgrade, in their opinion. They are forecasting Apple CPU unit shipments to increase 28% y/y in calendar 2007-a rate which is over 2x the current projected PC market unit shipment growth rate of 12% according to International Data Corporation (IDC). At Apple's Leopard preview event, management stated that the active Mac OS X user base is around 19 million large. Firm's analysis suggests that there is potential for up to $400 million (or over $0.40 per share) in contribution profits from Leopard in the 12 months after its release. However, they expect Apple to invest much of this financial bounty into marketing and R&D to drive additional PC share gains and accelerate the BtB product roadmap.

Never in the history of the PC, has a company been better positioned than Apple is at this time, to both gain share and improve profitability, in firm's opinion. They encourage investors to focus their 'Look At The Core' as they believe Apple's software holds the key to additional share gains and margin expansion. Reiterates BUY rating.

Notablecalls: Well, it's good to know BTS was healthy for AAPL. Yet, I don't see this coming as a surprise to anyone. Would not be surprised to see some interest in AAPL following the note but that's about it.

According to the WSJ's "Heard on the Street"column prisons are shaping up to be a growth business. Crowded jails, stretched state budgets, mandatory sentencing and a border crackdown have put the profit and shares of the nation's biggest private-prison operator, Corrections Corp. of America (CXW), on a jailbreak. The stock price of the co is up 45% since Jan. 1. Shares in private-prison co's were popular in the mid-90s, before tumbling on financial woes. And bulls admit that it is unrealistic to expect Corrections Corp.'s shares to keep up this pace qrtr after qrtr. But they add that the co, manager of more than 60 state and federal detention centers in 19 states and DC, is well-positioned in a little-understood and fast-growing corner of the economy: outsourced incarceration. "They're riding a great wave right now in the industry," says Anton Hie, of Jefferies, who rates the stock a Buy. "We've had a lot of new shareholders coming into the stock, with a shift from value investors to growth investors." The upshot for investors now: The current excitement seems justified, but it will likely ramp up near-term volatility. Those interested in owning a share of the prison business should be thinking long term and bracing for inevitable bumps.

The NY Post reports that Jane Pratt, the founder and former editor-in-chief of Jane magazine, has finally landed her own radio show on the Sirius Satellite Radio (SIRI). Sirius is expected to announce today that she will be chatting it up once a week in a live, 3-hour show called Jane Radio that will feature music, rants, and plenty of call-ins.

According to the Barron's, Charles Schwab and Morgan Keegan dominated Barron's semi-annual ranking of brokerages' top share recommendations (Focus List). In 6 mo period, MK picks are up 21.15%; in 1 year period, MK picks are up 35.35%; in a 3y period, CS picks are up 68.56%; and in a 5y period, CS picks are up 74.03%. Morgan Keegan's Focus List, put together by research director Elkan Scheidt, profited from positions in the consumer-discretionary, energy and industrial sectors, as well as a healthy dollop of small- and mid-cap names, he says. Many of the them aren't closely tracked by big Wall Street brokerages. Lately, Scheidt has lightened up on energy, removing UPL, ESV, and HP from the list. He's also added railroad Genesee & Wyoming (GWR), after it fell, and Phillips-Van Heusen (PVH).

Near 80, Deere (DE) shares are off more than 11 points from May's high. The stock could hit $105, in a year and $134 in two, as rising corn prices put more cash in farmers' pockets.

At $17.8, Nidec (NJ) trades for a rich 30 times earnings. But the stock could climb 15% to 20% as the company's growth rate increases. One fan says it should be a "core stock."

According to the Barrons' "Technology Trader" section shares of NeuStar (NSR) were jostled Fri by a fierce debate. In the morning the shares of NeuStar fell 4 bucks, or about 14%, to $25, b/c NeuStar said it had agreed to a 10% cut in the fees it gets from US phone co's for operating the country's call-routing database. But by the end of a day of nearly 10x its normal volume of trading, NeuStar stock closed back at 28.34, down just 2% for the day. It's fair to say that there's a divergence of opinion about what NeuStar's price cut augurs. NeuStar's growth spurred investors to send its shares as high as 37.73 by May of this year, a climb of 70% from its Jun'05 IPO. NeuStar's May price represented a mkt value of $3bn, or 9x the $330m in revs that analysts anticipated for '06, and 40x the consensus est for $0.93 in EPS. That invited the scrutiny of skeptical investors who, as of May, had shorted about 13m shares on the advice of analysts like Mark Roberts and his team at Off Wall Street Consulting Group. Mark Roberts is glumly sticking to his view that NeuStar shares could drop to $18. "The fact they had to renegotiate this contract that still had 5 years left shows they are not in a very strong position," he grumbled. "They are making a silk purse out of a cow's ear."

Barron's interviewed Symantec (SYMC) CEO John W. Thompson. It just so happens that the big security-software vendor's products account for 45% of the sales of Digital River (DRIV). Since Nov'05, Digital River's shares have more than doubled, to about $50. That's raised the co's valuation to 7x trailing 12 months' sales and 17x trailing cash flow and probably tortured the skeptics who'd sold short about 8m shares as of August. One of the persistent short stories about Digital River is that its big customer Symantec will go away. According to the story, Symantec would take its online sales in-house, cutting out the middle man Digital River. So Barron's asked Symantec CEO Thompson if that was the plan. "Digital River will continue to manage our online storefronts," Thompson said. Digital River's computer systems are connected to Symantec's, and Symantec would need meaningful resources to replicate the Digital River system. Article suggests that it doesn't sound like Digital River is on Symantec's chopping block.

"Plugged In" section discusses CDW (CDWC), saying nothing new. Hewlett-Packard accounts 28% of the co's revenue and it main competitor is Dell. "Generally speaking, we can do things more quickly than Dell," CEO John Edwardson says. So, "if we do what we do very well, we can continue to take mkt share," he adds. In short, selling the right stuff faster than the next guy at a competitive price is CDW's edge. What would Dell need to do to dull that edge? "They would have to invest a lot more in training and employing people," Edwardson said.

The preliminary results of BSX's Q3/06 suggest sequential declines in revenues in both the US and in Europe/RoW. BSX indicates a slowdown in growth of DES penetration in Europe, and declines in the US market. Other potential causes for the shortfall could be a) typical summer slowdown, especially in Europe; b) increased publicity regarding concerns of late thrombosis (firm would prefer to see Johnson & Johnson's sales of Cypher to verify); and c) an increase in market shares for Medtronic and/or Conor Medsystems in Europe.

Firm says the shares are trading at a large discount to our price objective, discounting a significant decline in the TAXUS franchise. The shares are likely to remain weak given the lower TAXUS sales, but firm retains their Buy rating due to upcoming milestones including: (a) evidence of successful integration of AMIH and realization of synergies; (b) details on product launches including the Contour threads and coated biopsy needles; (c) rulings in the litigation with CONR and Biosensors; (d) BSX's response to the FDA Corporate Warning Letter, and the launch of the TAXUS Libert stent expected in Q2/07; (e) clinical data and early European launch information for competing stents; and (f) additional acquisitions/in-licensing deals.

Notablecalls: TAXUS weakness doesn't come as a surprise, but the magnitude of shortfall is bigger than expected. Expect ANPI to see some weakness today.

Cowen notes that last night competitors of Dyax (NASDAQ:DYAX), Jerini and Kos announced mixed results from 2 Phase 3 trials of Icatibant in HAE. While one of the trials succeeded, the other missed its primary endpoint. The FDA has been pretty clear that Dyax and Genzyme need to submit two randomized, positive, blinded Phase III studies for DX-88. Should the same standard apply to Icatibant, Jerini and Kos would need to conduct another trial, presumably pushing out Icatibant's launch to H2:08, in line with DX-88's timing. Although this is not assured - Kos and Jerini continue to expect to file for U.S. and EU approval by YE:06 - last night's news is a positive for Dyax. With a proof-of-concept data, firm believes that downside to DYAX is limited and that the stock is positioned to outperform over the next 12-18 months as DX-88 makes progress in completing its clinical trial program.

Notablecalls: May see mild interest in DYAX today, but wouldn't count on it. Rather take it as an educational note in case of further news from Jerini/KOSP.

While Nike exceeded the consensus estimates proving critics wrong, analyst community is remaining a bit cautious.

Citigroup notes that Nike's top line grew 8.6%.Global futures were up 6.0%, slightly higher than they were expecting. U.S. futures were stronger than expected at 8%.

However, gross margins contracted by 120 basis points due to higher raw materials and mix shifts. Inventories increased another 15% during the quarter, which was significantly above revenues and futures.

Overall, despite concerns in the market, Nike's overall business appears to be healthy. Firm thinks Nike's innovation on both the performance and fashion side will drive growth in footwear and apparel growth will continue to be strong.

Firm thinks the gross margin pressure and higher inventories could be for the short term, especially if Europe and Japan continue to improve.

Merrill Lynch believes the stock is up because US futures were strong and gross margins for August were within management's expectations (versus a recent trend of missing expectations). They think a $5 move in the aftermarket is a little much however, recognizing NKE has been an underperforming name in consumer discretionary.

Firm notes that GMs are now seen flat or below F06 levels, offset by share repurchase. NKE bought back over 2% of its share base, pacing shares down over 5% for the year. Margin pressure is in footwear (oil and labor input cost inflation, higher discounts in the UK and Japan, and product and regional mix shifts). Marketing spend for August was $50mm below firm's estimates, and mgmt expects SG&A up mid teens for November, putting firm's EPS 4c below consensus at $1.14.

Susquehanna says they are becoming increasingly concerned about the inventory build at Nike. 1Q07 marked the third consecutive quarter where the company posted double-digit growth in its inventory position (up 15%), but only a single-digit gain in sales (+7% in constant dollars). While firm believes there are some justifications for the higher inventory levels the company is currently running at, which management noted was partially due to focusing more of its sales efforts on increasing its "at once" business versus the brand's historical reliance on "futures," they believe there is considerable risk the company might be compelled at some period in FY07 to bring its inventory levels more in balance with its sales performance. If this occurs, the resulting promotional activity could have a significant negative impact on the company's gross margin and operating results.

Notablecalls: While Nike did better than expected, it is not enough to silence the critics. Have to agree with both Merrill and Susquehanna: $5 move looks excessive and inventory build is bizarre. Expecting the stock to settle down below the yesterday's afterhours prices today.

Goldman Sachs out on defence of FormFactor (NASDAQ:FORM) following yesterday's weakness, saying that most of the concern about near-term pause in fundamentals centers around the view that DDR2 driven demand will be weaker than expected for FORM driven by a slowdown in the DDR2 transition, particularly in Taiwan.

Firm continues to believe that these negative views are overemphasizing one isolated issue and ignoring the many positive factors that are more than offsetting the end of the DDR2 transition that was fully expected. Over the near-term, they see several drivers of continued positive business momentum, including:

(1) Their checks during a recent trip to Asia indicate that several DRAM makers in Taiwan intend to add significant capacity in CY2Q2007. This capacity needs to be tested and therefore will require significant probe card orders over the next several quarters. These orders will be made by the very same customers that the market is concerned about slowing orders because of the end of the DDR2 transition. FORM has multiple revenue drivers and in this case customers are reordering for capacity even as this one technology driver is slowing.

(2) While all of the negative calls are focused on Taiwan, firm believes FormFactor won a significant order from Hynix (in Korea) in early September. They believe the Hynix win increased the company's visibility into CY4Q2006. They believe the market is ignoring the strength in Korea in order to focus on an isolated negative issue in Taiwan.

(3) The market is focusing only on isolated negatives in the DRAM market while ignoring the strong growth in the NAND and wafer level testing segments which are the expected drivers of incremental growth in CY4Q2006.

Goldman Sacks notes that Nielsen's monthly survey, our best source of mid-quarter data for the pet retail sector, shows that sales growth continued at the strongest rate in the past year, even with the prior month, and yielding the best trailing three-month period for industry sales. Weighted average growth in the four categories surveyed by Nielsen for the period of August 12 - September 9 tracked at 4.4%, even with the prior month. Over the past three months, sales increased 4.0%, versus a 3.6% increase in the prior three month period.

This showing reinforces firm's confidence in PetsMart's (NASDAQ:PETM) sales momentum. Of late, the company is having a hard time converting solid sales to profit growth, and is ramping up discretionary investment, further pressuring the earnings outlook. The company addressed these issues effectively at firm's recent Conference, and should tackle them further at its upcoming analyst meeting (9/28).

Merrill out on Advanced Micro Devices (NYSE:AMD) following visiting with AMD and a variety of related PC supply chain companies in both Austin and Taiwan over the last two weeks. The usual near-term chatter about a seasonal uptick in PC shipments has been predictable enough, but a number of more interesting points have emerged from their conversations as well.

Firm continues to be neutral on the stock - there's share gain potential for the long term, but also several intermediate-term challenges that they don't think the market fully appreciates. With that in mind firm offers four predictions:

Prediction 1: AMD's share gain in server processors will continue unabated, with Intel's Woodcrest/Blackford product having only a minimal competitive impact. Firm thinks AMD could get close to 40% of the server processor business by the end of next year.

Prediction 2: AMD won't get past 15% of the mobile processor market in 2007. Firm's meetings indicate that AMD's optimized mobile architecture isn't coming until the fourth quarter of next year, which is too late to have much of an impact on 2007 numbers. The updated 65nm version of the existing Turion product is coming sooner, but they don't think that will have much of an impact.

Prediction 3: Dell will give AMD less business than the bulls hope for the near term, but more than even the biggest bulls hope for over the long term. Firm thinks AMD will see 1.5 million to 2 million units at Dell this year, which isn't much, but they think that AMD should annual volume of 14 to 15 million units at Dell by 2008.

Prediction 4: AMD will allow ATI's discrete GPU business to slowly die on the vine, although management will never be willing to admit it. Firm thinks the 60% of ATI's business that is discrete GPU will show negative revenue growth for the next several years.

ThinkEquity out on Intel (NASDAQ:INTC), saying that they believe the price war may be over. They have heard from several well-placed sources in Asia that Intel has slowed the magnitude of its pricing cuts. This is largely unexpected in the channel. Much of this is occurring through more bundling of higher-end units with lower-end sales. This is radically different that what investors believe, in firm's opinion.

Intel still plans two pricing cuts-October and January. January will likely see Pentium D pricing down 15%-18%. Pentium 4 should see cuts of 10%-20% in January, and Napa declines of 20% (not Napa Refresh). They appear to be holding Merom prices stable beyond January.

Intel is essentially coming to terms with its share loss to AMD. If AMD was gaining share on pricing alone, Intel may be able to win back some of this share with pricing cuts. Firm has heard Intel has come to the conclusion that it will not gain share on pricing, so it should stop cutting pricing as fast as it has.

Intel pricing cuts are more likely at the low end, due to pricing elasticity. It appears that Intel is cutting prices more on the low end, where it really is not competing with AMD. However, it is still planning to lower prices, so the question is: Why? Several sources close to the decision-making process have told ThinkEquity that Intel is primarily interested in driving increased pricing elasticity, rather than competitive pricing cuts.

Firm has heard AMD is in the driver's seat with respect to ASPs. They have heard that AMD has orders above capacity, and it can cherry-pick customers according to margins. While they believe this is not immediately intuitively good for Intel, it removed pressure to cut (and the reward from cutting) prices.

Notablecalls: Two interesting notes on the Intel/AMD situation. Not actionable but good to know category.

Thursday, September 21, 2006

- Citigroup notes that DHS is expected to announce the award for the Secure Border Initiative contract to the Boeing team, which includes infrared suppliers DRS and Kollsman. This is a multi-year $2 billion contract. 2007 impact should be over $100 million.

The award is a potential negative for FLIR Systems (NASDAQ:FLIR), which dominates the border security market. SBINet should enable DRS and Kollsman to gain share. The firm had observed that given its incumbent position, FLIR had more downside than upside in SBINet.

They expect disappointments to continue (particularly in Q4) and reiterate Sell rating.

Notablecalls: Not sure this is news. But still, I'd watch FLIR in case it starts rolling over.

- Friedman, Billings, Ramsey is transitioning coverage of Broadcom (NASDAQ:BRCM) with an Outperform rating. In addition, they are adding BRCM to the FBR Top Picks list and establishing a $38 price target. In firm's view, most of BRCM's recent top-line disappointment is related to excess inventory as opposed to long-term market growth or BRCM's competitive positioning. They believe that 2007 consensus estimates are likely too conservative. With the stock trading at 19x pro forma FY07 EPS (compared with a trough of 18x in 2004), they believe downside is limited, with multiple expansion likely once growth resumes.

Firm notes that BRCM has grown in excess of 11% in each year of its existence, except 2001. Their bottoms-up forecast analyzes BRCM's prospects by market segment. Believes their above-consensus estimates (17.6% top-line growth, $1.50 EPS) are reasonable given the markets to which BRCM is exposed.

Firm's estimates assume 43% growth in WLAN (due to 802.11n penetration), 45% growth in Bluetooth (achievable through only a 10% increase in handset penetration), and 13% growth in set top/DTV (on growth in HD, DVR, and new DTV market). They assume only 6% growth in handheld, with Samsung volume offsetting a possible loss of the video iPod; however, upside exists since achieving even a small 1% share would add 4%-5% to BRCM's top line.

Notablecalls: Gutsy call from FBR. I like that. Expect to see some buy interest in BRCM today.

While unlikely VECO misses low-end of CQ3:06 order guide ($115-130MM), the issue is more CQ4 (as suggested by XRTX) such that CQ1:07 consensus revenue/EPS appears at risk (firm remains ~15% below consensus for CQ1:07).

While stock has underperformed the tech rally since mid-July (+5% vs +10%) and this is a prime candidate for M&A (AMAT, for example) and/or strategic buyers, they continue to wait for a reset of C2007 expectations to get more positive and see stock range-bound (at best) meantime. Maintains Hold.

Notablecalls: Not actionable but good to know category. I don't think it will get hit much following XRTX's guidance.

- Merrill Lynch notes that with Silicon Labs' (NASDAQ:SLAB) negative preannouncement yesterday, they're becoming increasingly cautious on Skyworks' (NASDAQ:SWKS) Sep-06Q. Silicon Labs, a supplier of GPRS transceivers, noted significant weakness at China OEMs and in the Taiwan ODM market. Skyworks also has significant exposure to these customers for both transceivers and power amplifiers (they estimate about 20% of sales). For the Sep-06Q, they're currently modeling for revenues of $198mn (1% Q/Q growth) and non-GAAP EPS of $0.05, which is inline with consensus.

While the firm believes LG's chocolate phone, which contains SWKS CDMA transmitter andreceiver silicon, is ramping strongly; Skyworks' share loss at Nokia continues to be a concern. Going forward, Nokia will source its CDMA phones through contract manufacturers such as Pantech and Curitel.

With shares up over 40% from their recent low amidst reports that inventory levels are normalizing in Asia, they believe the stock is pricing in an optimistic scenario. Clearly, Skyworks was somewhat oversold following 2Q earnings, but the company now trades at a premium to its primary competitor RFMD on CY07 EPS and is now inline with its four year average NTM P/E of 28x. Given share loss risk at Nokia, weak demand out of the China and Taiwan markets, lack of margin progress, and balance sheet problems (DSOs, inventory), they see limited upside from current levels. Neutral rating stands.

Notablecalls: Expect to see some pressure in SWKS in the coming couple of days.

- JP Morgan notes they spent the last week in Asia visiting several companies to assess PC,wireless, and overall semiconductor supply chain health. Most companies in the PC food chain appear to expect growth during 3Q06. However, a majority of the companies they visited expect sub-seasonal sequential growth Q3 and have limited visibility into Q4.

Many companies noted share gains by Intel in the channel, consistent with checks. However, firm's checks also indicate AMD (NYSE:AMD) is gaining share at OEMs, which should offset Intel's share gains in the channel since the OEM end market is larger and exhibits higher pricing and margins than the channel.

Checks indicate AMD's sales and margins are ahead of plan during 3Q06 due to robust demand for its processors (96% of 2Q06 sales). They believe the strong demand is being driven by share gains at key OEMs such as HP and Dell and is resulting in upside to both previous revenue and gross margin estimates.

As a result of the higher sales and margins, the firm is raising their C06 revenue and EPS estimates from $5.1 billion and $0.91 to $5.4 billion and $1.19. Maintains Neutral.

Notablecalls: Not actionable but good to know category.

- Prudential notes that Disney (NYSE:DIS) management indicated yesterday in a meeting with Prudential Entertainment Analyst Katherine Styponias that it expects to make more of their video content on-line to take advantage of the high expected growth rate in online display advertising.

Firm sees this as a positive for streaming media and web content delivery service provider Akamai (NASDAQ:AKAM). They believe a number of Disney media properties including ABC and ESPN are Akamai customers.

Firm continues to see no sign either from Akamai or from industry of any deceleration in demand for web content distribution, with video one of the primary growth drivers. They are currently modeling 46% organic y/y revenue growth for AKAM in 2H06, in line with 2Q06.

On top of the underlying growth in video delivery over the Internet, they believe Akamai is taking an increasing "share of wallet" at most of its major media customers.

Reiterates Overweight rating and $51 price target on AKAM.

Notablecalls: AKAM sure looks like it wants to move higher from here. Prudential may just have given a reason for a run.

- Jefferies & Co notes that over the past couple of days, they've been checking in with industry contacts for an update on Cingular's capex spending activity. Of course, Cingular is a major buyer of telecom equipment. The operator, this year, is expected to make up roughly 15% of overall capex spending and roughly 30% of wireless capex spending in North America.

Firm's industry checks indicate that Cingular is still rather slow in terms of spending activity. They recall that their checks in Q1 and Q2 indicated that Cingular's wireless spending levels in 1H'06 were softer-than-anticipated. Back then, contacts were suggesting that business within Cingular was slower-than- expected during the first half of the year. Many contacts " at that point -- had expected that Cingular would rebound in terms of spending activity during Q3. Looking back, that was wishful thinking. Now " most of the way through Q3 " they're hearing that the operator's business trends are still quite slow. Many contacts suggested that Q3 activity levels are slower-than-expected albeit not that different from 1H spending levels.

Cingular is deferring/slowing deployment of infrastructure on a number of specific projectsincluding deployment of new base stations and, in certain markets, the timing of UMTS market launches. Cingular is currently meeting with various consultants regarding significant operating and capital expense reductions planned for the business next year.

Notablecalls: To see how serious Cingular is about cutting costs just take a look at the InfoSpace (NASDAQ:INSP) news last night (scroll down). Add this to the Yahoo (NASDAQ:YHOO) warning. Canaries in a coal mine... Tough times ahead.

- Several firms are commenting on InfoSpace (NASDAQ:INSP) today after the co announced a loss of a major carrier customer for label tones:

* Piper Jaffray believes the customer was Cingular. Firm notes that year to date, InfoSpace's mobile revenues were $89.6M (48% of total revenue) of which label tone sales accounted for approximately $55M (61% of mobile revenue). Tey believe that Cingular accounted for the vast majority (likely in the 75-80% range) of label tone sales. Firm expects Cingular to continue to use InfoSpace for portal services, games and graphics.

They currently estimate $221M in 2007 wireless revenue. Of the $221M in revenues in 2007, they believe approximately half of that was for Cingular label tones. As such, they expect to significantly reduce their estimates. Also, wireless margins, which have been declining over the last 18 months, should further decline as a result of declining economies of scale in the wireless business.

The loss of a major carrier partner for label tones is a huge setback for InfoSpace. The firm believes shares will likely bottom in the $17-18 range (essentially 0.5x revenues plus $12/share in cash). They note that shares were trading at $18.40 after hours. While they expect shares to bottom near $17-18, they do not see any near term catalysts and thus would continue to remain on the sidelines. Maintains Market Perform rating.

* JP Morgan believes other carriers could potentially follow suit and develop similar relationships with record labels. As such, this announcement makes the firm question the longer term viability of INSP's Mobile business.

However, the company's Search business is driving significantly higher gross profit dollars than its Mobile business (reported 2Q gross profit for Search was 64% vs. 34% for Mobile segment) and the company has ~$13 cash per share. INSP announced it would detail a cost reduction plan within the next month - they believe necessary headcount reduction charges will put downward pressure on INSP's cash balance of $405M as of 2Q-end.

Firm's updated estimates are based on an 80% reduction in INSP's Label Tone business in F'07. They have reduced their estimates as follows: F'06 and F'07 Mobile revenues of $178M (from $186M) and $72.9M (from $218M) respectively. F'06 and F'07 total revenues of $377M (from $385M) and $278M (from $423M).

Notablecalls: Expect to see several downgrades today. I believe the shares may sink even lower than the $17-$18 suggested by Piper.

Barron's Online highlights Time Warner (TWX), saying that the co's stock is up only 5.7% over the past 2 years, making it the very definition of dead money. The shares have lagged all their big media peers: News Corp. is up 20.2%, while Disney and CBS are each up 30.8% and 8.6%, respectively in the same time period. At $17.60, Time Warner shares are cheaper than many peers. As a multiple of its operating earnings, a popular measure with media investors, Time Warner trades at just 7.3x next year's expected results, vs an industry average of 9x. Most of the bad news about America Online, a ball and chain around the co for years, may be fully discounted in the stock at this point. And other parts of the co's business could see some meaningful improvements next year. And the introduction next year of a separate stock for Time Warner Cable, could be a boon. That unit may be worth $50bn on its own, according to analysts, but Comcast, its bigger rival, has seen its shares rise 33% this year while Time Warner shares haven't risen at all. All that could help Time Warner shares rise 20% or more to the low $20s a share, with or without dramatic synergies."We like Time Warner b/c it is selling at a discount to pure distribution co's, like Comcast, when in fact most content co's, such as Disney, traditionally should get a premium," says Bill Nygren, a portfolio manager for the Oakmark Fund and Oakmark Select Fund. "I don't think that the content assets at Time Warner are worth less than the assets of the other media co's, and on top of that, you're getting an option on improved performance at America Online," says Nygren.

"Inside Scoop" section reports that shares of Eagle Materials (EXP) have tumbled 14% over the last year, but the Chmn Laurence Hirsch of the co has recently bought $14.1m in shares. Despite his 20-year involvement with the co, Hirsch's $14m investment is the first open-mkt purchase he has made of Eagle shares, notes Ben Silverman, of InsiderScore.com. "[Hirsch] is certainly somebody who has a pretty good idea of how the home-building and materials cycle rolls," Silverman says. "I think considering where the stock was back in April, and the earnings and guidance [Eagle] put out, he really felt that the stock was just oversold."

Wednesday, September 20, 2006

- ThinkEquity's Eddie Cheung and Eric Ross are commenting on Dell (NASDAQ:DELL) saying that while in Asia, they have heard from several members of the PC supply chain that Dell's (DELL) PC units and profitability are declining rapidly below expectations. They believe it may be possible that DELL will preannounce negatively again, likely in mid-October. Firm also believes Intel will effectively remove its marketing subsidies to Dell. They continue to believe that Dell represents the best short play in firm's Universe. Reiterates Sell rating and lowers price target from $18 to $17.

Firm expects Intel to drastically lower its marketing budget to DELL to essentially zero. Sources have suggested that Intel is in the process of reducing its marketing budget with Dell from several hundred million dollars per quarter to essentially zero. This will likely negatively impact Dell's operating margins as these marketing expenses will no longer be offset (and should improve Intel's operating expenses).

They believe it will be very difficult to make up the declines seen thus far in the October quarter. Firm would expect DELL to preannounce lower expectations in mid-October-if the company follows its past actions, it will attempt to bury its preannouncement in earnings season. Although this may seem counter-intuitive (given it provided no guidance), they note it has preannounced both of the past two quarters (without giving guidance).

Rev estimates: 3QCY06 from $14.5 billion to $14.0 billion; CY06 from $58.41 billion to $57.31 billion; CY07 from $61.5 billion to $59.5 billion. EPS: 3QCY06 from $0.23 to $0.18; CY06 from $1.10 to $0.99; CY07 from $1.20 to $1.05.

Notablecalls: Again, nice work guys! Looks like DELL may have another couple of points of downside in it. No quick fixes here.